The role of repudiation and trade and credit sanctions in the accumulation of sovereign debt, production capital and reputation

This paper analyses the optimal accumulation of capital stock, external debt and reputation by explicitly incorporating the inclination of a sovereign country to service its external liabilities and the adverse effects of not meeting foreign loans’ commitments on the country’s trustworthy reputation. Repudiation and loss of reputation might limit the country’s access to international markets of credit, consumer and capital goods; and subsequently might result in a higher average cost of servicing the country’s future external liabilities, less favorable terms of trade with the rest of the world and accelerated depreciation of capital stock.